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Sharing experience on auditing urban environmental management

Grant Hehir, Auditor-General for Australia, attended the 18th Meeting of INTOSAI Working Group on Environmental Auditing in Bundung Indonesia in July 2018, and presented a keynote address titled Sharing experience on auditing urban environmental management. The accompanying paper to the speech is available here.

Opening remarks

In Australia, most of the population lives in our big cities so good urban environmental management is important. Responsibility for our urban environment is spread across several Government entities at the national level and across different levels of government in our federated system of governments. The Auditor-General of Australia is charged with assessing the effectiveness of Australian Government entities.

This paper:

provides an overview of Australia’s urban environment and the shared responsibilities for environmental management across national, state and local governments;

examines key themes arising from the ANAO’s audits of urban environmentrelated programs and activities; and

reflects on the importance of international partnerships and capacity building.

Australian urban environment

Every five years the Australian Government engages a panel of environmental experts to undertake a wide-ranging assessment of the condition of the Australian environment. Among other issues, the panel assesses the atmosphere, built environment, heritage, biodiversity, land and water. In relation to the urban environment, the Australia State of the Environment 2016 Report noted that:

Australia’s growing population—particularly in our major cities—increasingly places pressure on livability (urban amenity, housing, transport, air and water quality). It also negatively affects our air, land and water resources through increased consumption and pollution—although declining consumption and pollution per person might offset this growth. An increasing population also puts pressure on land, the natural environment and infrastructure.1

A shared responsibility

Urban policy and program management crosses many areas and levels of government.

Australia is a federation of six self-governing states and two self-governing mainland territories. The Australian Constitution sets out the responsibilities of the Australian Federal Government and state governments. The six states and the Northern Territory have established one further level of local government.

The responsibilities for many matters, including managing urban environments, are shared across all three levels of government.

Matters of national significance and matters that need coordinated action by all Australian governments are overseen by the Council of Australian Governments (COAG). COAG comprises representatives from all Australian governments and meets about two to four times a year. A range of intergovernmental agreements have been developed through COAG. The Australian, state and territory governments use these agreements to manage the responsibility for shared and overlapping matters such as environment and infrastructure.

Broadly speaking, the different levels of responsibility for urban environmental management are divided along the following lines:

The Australian Government is primarily responsible for the protection of matters of national environmental significance and for implementing Australia’s obligations under international environmental treaties and conventions;

The states and territories are responsible for a broad range of environmental matters including the regulation of pollution, approval of certain types of development activity, and natural resource management; and

Local governments handle community needs like waste collection, public recreation facilities and town planning.

The Environment Protection and Biodiversity Conservation Act 1999 is the primary national legislation for protecting biodiversity and the environment. The objectives of the Act are broad. These include:

the protection of matters of national environmental significance;

the promotion of ecologically sustainable development;

the conservation of biodiversity; and

cooperative approaches to the protection and management of the environment.

Shared arrangements also exist for other issues related to urban environmental management such as infrastructure, transport, and urban and regional development.

Australian Government urban environment related entities

In the Australian Parliament, there are three portfolios that include aspects of urban environmental management:

Environment and Energy;

Infrastructure, Regional Development and Cities; and

Agriculture and Water Resources.

The Australian Government Department of the Environment and Energy is the lead entity in the environment and energy portfolio. The department is responsible for designing and implementing Australian Government policy and programs to: protect and conserve the environment, water and heritage; promote climate action; and provide adequate, reliable and affordable energy.

There are a further eight entities within the Environment and Energy Portfolio. Some of these entities have responsibilities relating to urban environmental management including: renewable energy regulation; weather forecasting services; financing the clean energy sector; and advice on climate change mitigation.

The Australian Government Department of Infrastructure, Regional Development and Cities and its portfolio entities are responsible for the design and implementation of the Australian Government’s infrastructure, transport and regional development policies and programs. The portfolio is responsible for outcomes related to the urban environment, including:

improving infrastructure across Australia through investment in and coordination of transport and other infrastructure;

strengthening the sustainability, capacity and diversity of cities and regional economies, including through facilitating local partnerships between all levels of government and local communities through reforms that stimulate economic growth; and

providing grants and financial assistance.

The Australian Government Department of Agriculture and Water Resources and some its portfolio agencies are responsible the sustainable and productive management and use of rivers and water resources. This includes policy and reform in the area of urban water.

Together, the Environment and Energy; Infrastructure, Regional Development and Cities; and the Agriculture and Water Resources Portfolios have been provided with aggregated budgeted expenses for 2018–19 of around AU$12.7 billion.2

The ANAO’s approach to auditing urban environmental management

Auditor-General’s mandate

The Auditor-General for Australia is responsible under the Auditor-General Act 1997 for auditing Australian Government public sector entities and reporting to the Parliament of Australia. The Auditor-General’s functions include undertaking financial statement audits and performance audits of Australian government entities. The ANAO assists the Auditor-General to deliver these functions. The Auditor-General Act determines the scope of the ANAO’s urban environmental auditing activities.

The ANAO’s urban environment related auditing is generally conducted under the Auditor-General’s performance audit mandate. A performance audit is a review or examination of any aspect of the operations of an entity that is undertaken in accordance with the ANAO Auditing standards. Performance audits contributes to improved public sector administration and accountability through objective reporting on the performance of Australian Government programs and entities. They often include specific recommendations to assist public sector entities to improve performance. Performance audits may also involve multiple entities and examine common aspects of administration or the joint administration of a program or service.3

Once a performance audit or assurance review is completed and approved by the Auditor-General, the relevant report is tabled in the Parliament of Australia. In 2017–18, the ANAO tabled 47 performance audits in the Australian Parliament.

Annual audit work program and audit coverage

The Auditor-General chooses to publish an annual audit work program in July each year, which outlines the proposed audit activities to be undertaken in the financial year. As an independent officer of the Australian Parliament, the Auditor-General has the discretion in the performance or exercise of functions or powers and may at any time explore additional areas of audit interest beyond that published in the annual audit work program. The purpose of the annual audit work program is to inform the Parliament, government sector entities and the public of the audits the ANAO proposes to deliver throughout the financial year, covering financial statements, performance audits, and other assurance activities. The annual audit work program is guided by the following objectives:

respond to the interests and priorities of the Parliament of Australia;

provide a balanced program of activity informed by risk, and which promotes accountability, transparency and improvements to public administration;

follow up on past recommendations and identify trends for improvement, or declines in performance across government; and

apply all of the Auditor-General’s mandate.

Auditing environment management

The Australian Government’s responsibilities for managing the environment includes the regulation of risks to matters of national environmental significance and its role in funding third parties to deliver programs and activities.

In this context, the ANAO has focused its environmental audit coverage on program design, program delivery, regulatory functions, asset management and service delivery. This focus has allowed the ANAO to examine:

the basis on which new environmental policies have been developed;

the extent of compliance with legislative requirements designed to protect the environment;

the equity and efficiency of environmental funding activities; and

if the objectives for which funding has been provided for environmental programs and activities are met.

For the financial year 2018–19, specific characteristics and risks within the Environment and Energy portfolio that influence the ANAO’s allocation of financial audit resources and the annual selection of performance audit topics and other activities include the:

assessment and approval of controlled actions under the Environment Protection and Biodiversity Conservation Act 1999 and the monitoring of ongoing compliance with conditions;

maintenance of the weather observation network and delivery of accurate and timely forecasts during extreme weather events and natural disasters;

revised framework for supporting natural resource management;

valuation methodology and calculations for key administered assets (including environmental water entitlements) and liabilities (including the restoration of Antarctic base sites to original condition); and

accounting for loans and investments in new or emerging technologies in the developing climate change sector, together with the associated interest and fee income.

Auditing infrastructure management

Specific characteristics and risks within the Infrastructure, Regional Development and Cities portfolio that influence the ANAO’s allocation of financial audit resources and the annual selection of performance audit topics and other activities include:

funding provided to third parties to deliver government outcomes on national infrastructure projects;

major procurement and contracting activities, and associated probity risks;

partnering with the private and public sectors, including government business enterprises, often using innovative financing models;

financial management and accounting for a range of grant programs;

a range of transport regulatory responsibilities;

complex valuation methods and models used to derive the value of Australian Government investments and liabilities; and

completeness and accuracy of revenue streams.

The ANAO has identified 11 potential performance audits in the Environment and Infrastructure portfolios for 2018–19 given the identified risks, expenditure and diversity of Australian Government programs and activities. The ANAO work program for 2018–19 has 87 potential performance audits across all Australian Government portfolios.

Themes from the ANAO’s recent environmental audit coverage

The ANAO’s coverage of environmental matters as part of its performance audit program has highlighted a number of themes across the Australian Government’s delivery of programs and regulatory functions. Over recent years, the ANAO’s performance audits have identified:

weaknesses in the arrangements for the provision of Australian Government funding for environmental purposes;

variability in the maturity of risk-based frameworks for the delivery of regulatory functions; and

scope to improve performance measurement frameworks to determine the impact and effectiveness of the Government’s environmental programs and regulatory functions.

Providing funding for environmental purposes

Environmental programs funded by the Australian Government are largely delivered by non-government organisations through grant funding arrangements. Robust grant funding administration can enable the effective delivery of these programs.

The ANAO has identified weaknesses in the Australian Government Department of the Environment and Energy’s processes for assessing applications for funding to deliver environment-related projects. In a series of performance audits, the ANAO made recommendations to the department to strengthen the assessment and selection processes used to determine recipients of Australian Government funding for environmental purposes, including to:

design clear eligibility criteria;

improve the clarity of grant guidelines;

assess all eligibility criteria in all grants rounds conducted;

retain sufficient documentation to evidence eligibility and merit assessments; and

implement appropriate probity arrangements.

Auditor-General Report No. 4 of 2016–17 Award of Funding under the 20 Million Trees Programme, found that the department had appropriately designed the program to align with the objectives established by government, taking into account election commitments and the required focus on community engagement through the award of grants. The effectiveness of the program was, however, undermined by widespread weaknesses in administrative practices. In particular: published assessment processes were not followed; conflicts of interest were not appropriately recorded and managed; eligibility assessments were not conducted in a transparent or timely manner; assessment practices were not efficient; and key issues relating to the conduct of the assessment and selection process were not sufficiently drawn to the Minister’s attention to inform funding decisions.

Auditor-General Report No.14 of 2016–17, Abatement crediting and purchasing under the Emissions Reduction Fund examined one of Australia’s key mechanisms for achieving its greenhouse gas emissions reduction targets, with AU$2.55 billion allocated by the Government for the purchase of carbon credit units. This audit examined the effectiveness of the Clean Energy Regulator’s crediting and selection of carbon abatement to purchase under the Fund.

The audit concluded that, overall, the Regulator established sound arrangements to manage the crediting and selection of carbon abatement for purchase. There were some processes that, nonetheless, required further attention to enable the Regulator to better demonstrate the effectiveness of its activities. The report recommended that appropriate documentation be retained to demonstrate the rationale for undertaking assessments and that all relevant assessment criteria have been addressed during assessment.

The achievement of environmental outcomes is more likely where funding is directed to those applicants that clearly demonstrate merit against established funding criteria. The establishment of robust assessment and selection processes for programs and activities helps to ensure that this occurs. Administering entities should also focus on the efficiency of their assessment processes to ensure that administration costs are kept to a minimum. This maximises the funding available to achieve desired environmental outcomes.

Delivery of environmental regulation

Sound environmental regulation supports ecologically sustainable urban development. The ANAO has identified variability in the maturity of risk-based approaches to the delivery of regulatory functions. The Auditor-General Report No. 43 of 2013–14 Managing Compliance with Environment Protection and Biodiversity Conservation Act 1999 Conditions of Approval found that nearly 14 years after the enactment of the Act, the department was yet to establish mature administrative arrangements to effectively discharge its regulatory responsibilities in relation to approved controlled actions. Five recommendations were made to improve the compliance management framework.

Progress made by the department to implement these recommendations was subsequently examined in the report Monitoring Compliance with Environment Protection and Biodiversity Conservation Act 1999 Conditions of Approval: Follow-on (Auditor-General Report No.36 of 2016–17). This follow-on audit identified that, while the department had implemented a risk-based approach to manage aspects of its regulatory activities, limited progress had been made in relation to the implementation of broader initiatives to strengthen the department’s approach to regulation. Specifically, the department had not undertaken a structured departmental-wide risk assessment of its regulatory activities to inform its resourcing decisions.

A riskbased approach to regulation supports the targeting of regulatory activities to areas of highest compliance risk. This approach helps to ensure that compliant entities are freed from unnecessary regulatory intervention, while additional regulatory effort is directed at those entities that are less likely to meet their compliance obligations. A sound understanding of risk also allows regulators to frame their risk tolerance and appetite, which should be used to inform all aspects of regulatory activity.

Measuring the impact and effectiveness of environmental functions

Fit-for-purpose performance measurement frameworks enable an assessment of the extent to which urban environmental programs are achieving established objectives. In line with the importance of sound performance measurement and reporting, and the rollout of the Public Management Reform Agenda, the ANAO has directed its audit coverage to examine the extent to which public sector entities are improving their performance measurement and reporting practices. This work has involved general coverage across the ANAO’s performance audit program, including its examination of environmental matters, along with targeted audits examining specific aspects of the reform agenda. These targeted audits have included an assessment of how entities are managing new requirements for the development of corporate plans and performance statements.

Common issues that have reduced the usefulness of performance measurement frameworks for environmental programs and activities include:

heavy reliance on activitybased performance information, which does not provide sufficient insights into progress or impact of programs and activities; and

changes to measures used to report publicly on performance results year-to-year or consolidating performance information across several programs.

Auditor-General Report No. 32 of 2017-2018, Funding Models for Threatened Species Management assessed the effectiveness of the Department of the Environment and Energy’s design of the Threatened Species Prospectus.4 The Prospectus was an innovative model for attracting private and philanthropic investment to support the recovery of threatened species in partnership with government, and conservation and community groups. The audit concluded that the department’s design of the Prospectus was effective, other than the lack of a fit-for-purpose performance framework.

The audit found that the department was not well placed to monitor and report on the effectiveness of the Prospectus in attracting additional funding for threatened species recovery from private and philanthropic investors. The department had not established a fit-for-purpose framework for measuring the success of the initiative in attracting external investment. Limited performance data was collected against the targets of the Threatened Species Strategy.

Ultimately, determining whether programs and activities have had the intended impact requires entities to plan for performance measurement and evaluation early, particularly where baselines are required against which progress can be measured. Given the nature of environmental programs, particularly the length of time required to achieve some environmental outcomes, early consideration of performance measurement allows entities to give sufficient consideration to the establishment of interim or proxy measures to inform implementation over time.

Certain measurement activities, such as those required for monitoring greenhouse gas emissions, rely on rigorous source data, technical modelling and sound judgement. The Auditor-General Report No. 1 of 2017–18, Accounting and Reporting of Australia’s Greenhouse Gas Emissions Estimates and Projections assessed the effectiveness of the Department of the Environment and Energy’s arrangements for the preparation and reporting of Australia’s greenhouse gas emissions estimates and projections. This audit found these arrangements were generally effective. Appropriate processes had been established to prepare, calculate and publish Australia’s greenhouse gas emissions estimates to June 2014 and emissions projections to 2030. Appropriate quality assurance and control procedures were in place for the preparation of most of the emissions estimates and projections, but could be: better applied in relation to data entry to improve inventory accuracy and completeness; and expanded to better encompass the estimates projections for all sectors and abatement measures.

Governance arrangements for estimates and projections were generally effective, with the exception of risk management, which required strengthening. The department had not retained documentation to demonstrate that risks to preparing and reporting emissions estimates and projections were actively managed and the implementation of risk treatments monitored.

The absence of meaningful performance information makes it more difficult for entities responsible for the delivery of environmental programs and activities to effectively manage delivery and for stakeholders to judge the impact and effectiveness of the public funding. In particular, the absence of early consideration of measurement approaches means that entities are not well placed to establish relevant baselines and collect fit-for-purpose data to inform monitoring activity over the course of implementation. It also results in a limited evidence base on which the development of new policies can be based.

Other urban environment auditing in Australia

Performance audits in relation to the urban environment delivered by state and territory Auditors-General complement the ANAO’s activities. Two Victorian audits and an audit from New South Wales are relevant examples.

In the state of Victoria, the projects likely to have a significant environmental impact are to be assessed under an Environmental Effects Statement (EES) process. The Victorian state Auditor-General’s Effectiveness of the Environmental Effects Statement5 audit assessed whether the state Department of Environment, Land, Water and Planning managed the ESS process effectively. The audit covered the quality of information for decision-making; the monitoring of conditions imposed through the process; the extent to which previously recommended reforms had been implemented; and whether the process is well equipped to deal with issues such as climate change impacts.

The audit concluded that in the absence of legislative reform, the department is constrained in its ability to improve outcomes from the EES process for developers and the community. The State Government did not proceed with planned reforms, which were designed to increase administrative efficiency, better align with Australian Government regulation, and improve transparency and accountability for stakeholders. The report made eight recommendations aimed at improving the department’s management of the process.

In the Improving Victoria’s Air Quality6 audit, the Victorian Auditor-General examined whether Victoria’s air quality meets the standards for ozone and pollution emission discharges. The audit found that the Victorian Environmental Protection Authority (EPA) reported generally good air quality, however, the EPA was unable to demonstrate that its data was representative of the air quality likely to be experienced by most Victorian communities. The audit highlighted inconsistencies between EPA’s raw data and what had been published. The audit made five recommendations to the EPA and one to the Victorian Department of Environment, Land, Water and Planning.

The audit found the decision-making processes for major projects had improved over recent years, particularly in relation to its consultation with the public, managing probity and publishing records of stakeholder meetings. The Commission nonetheless needed to further improve how it communicates its decisions to the public.

Sharing and partnerships

The ANAO seeks to share its knowledge and learn from the experiences of others through participation in three working groups environmental auditing:

Australasian Council of Auditors-General8 (ACAG)/ Pacific Association of Supreme Audit Institutions (PASAI) Regional Working Group on Environmental Auditing;

Asian Organisation of Supreme Audit Institutions Working Group on Environmental Auditing; and

International Organisation of Supreme Audit Institutions Working Group on Environmental Auditing.

The ANAO’s attendance at working group meetings has provided important insights into alternative auditing methodologies, tools and approaches and their application in differing contexts. In particular, presentations on specific audit work, including successful strategies adopted and important lessons learned, have informed the ANAO’s delivery of its audit coverage. The attendance of government representatives, international speakers and specialist performance auditing bodies also provides important insights into key areas of focus across member countries and international developments that are of relevance to the delivery of the ANAO’s audit program.

10th ACAG/PASAI Regional Working Group on Environmental Auditing

The Queensland Audit Office hosted the 10th meeting of the ACAG/PASAI Regional Working Group on Environmental Auditing from 15 to 17 May 2018 in Brisbane, Australia. Twenty-four participants from 13 audit offices attended the meeting, as well as representatives from ACAG, PASAI, and the INTOSAI WGEA secretariat. The programme and discussion at the meeting focused on:

increasing audit impact and visibility;

environmental impact, including organisations’ own activities;

sustainable development goals;

water and the marine environment;

increasing capacity and capability; and

opportunities for co-operation and knowledge sharing, communication, and training needs.

The evaluation of the meeting showed that participants valued the opportunity to share knowledge and build capacity.

Partnering with Supreme Audit Institutions

In addition to the working groups on environmental audit, the ANAO has fostered key partnerships with Supreme Audit Institutions in Indonesia and Papua New Guinea over many years. These arrangements provide ANAO officers with a unique perspective on auditing in differing contexts.

The ANAO has partnered with the Audit Board of The Republic of Indonesia (BPK) since 2006. The ANAO’s activities under the Australia Indonesia Economic Cooperation (PROSPERA) Program are designed to support BPK’s efforts to strengthen management of its audit functions. The program is aligned with the BPK strategic plan objectives of delivering high quality audits and driving the achievement of national development goals by Indonesian Ministries and Agencies. Key program focus areas are performance and financial audit management, quality assurance systems and organisational development to support audit management and capability. A senior ANAO staff member is deployed to the BPK to provide ongoing support to the implementation of performance audit action plan and related organisational development activities.

The ANAO and the Papua New Guinea Auditor-General’s Office (AGO) have also worked together on the development of auditing practices since the 1970s. The ANAO’s activities under the Institutional Partnership Program (IPP) with the AGO support the AGO’s efforts to strengthen the management of its audit functions, in-line with the AGO Corporate Plan strategic objectives.

Concluding comments

Australia’s population is highly urbanised with large population growth in the major cities. With substantial investment by the Australian Government in environment and infrastructure-related activities, the ANAO will maintain its scrutiny of urban environment matters in the context of its broader performance audit program. This audit work provides assurance to the Australian Parliament regarding the extent to which policy and program objectives are being achieved. Urban environment related performance audits also highlight to administering entities potential opportunities for improvement.

As has been the case over many years, the ANAO’s continued scrutiny of environmental management will be informed by the important lessons learned from our peer SAI’s experience in conducting audits in particular, our engagement with various SAI working groups on environmental auditing and the work of state and territory audit offices in Australia.

4 The State of the Environment Report 2016 noted that, ‘Cities are often located in areas with high biodiversity, and the process of urbanisation itself is likely to have led to many species that formerly occurred in these places now being threatened’.